Transfer Pricing

Question 1

Favourable conditions for using market prices include:

MESs Outside D I Vc Force Isolate

Answer 1

Ø Minimal interdependences of units.
Ø Existence of a competitive intermediate market with dependable market-price quotations.
Ø The selling subunit should have the option of not selling internally and an arbitration procedure should be
available for settling disputes amongst subunit managers.
Ø Generally, the outside market price would be a ceiling not to be exceeded by the internal transfer price.
Ø The main difficulty with the use of market prices for transfer prices is the frequent lack of a market that is
perfectly competitive.
Ø If there is idle capacity in a supplying division and no market for the intermediate product, the extent of
top management’s interference in a transfer-pricing dispute between independent divisions can create a
dilemma.
Ø To benefit the organisation as a whole, the supplying division should transfer the intermediate product at
a price equal to its variable cost only.
Ø However, if the manager of the supplying division were forced by top management to forego a profit by
accepting such a low price, there would be a natural lessening of both managerial effort and subunit
autonomy.
Ø If there are only some isolated price quotations reflecting temporary distress or dumping prices, they may
be appropriate in general for monitoring short-term performance but not for making long-range plans.

Question 2

transfer pricing policies

Answer 2

1. Market-based
2. cost plus a mark-up
3. marginal/variable cost
4. full cost
5. negotiated
6. marginal/vc + opp cost